GDP and Retail Trade

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The scarcity of figures in the presentation of the report on the performance of the Cuban economy in 2017 (Cabrisas, 2017) allows for multiple readings. The one that is presented here is based on an econometric model empirically validated, summarized at the end of the article for the interested reader.

The figures presented (Cabrisas, 2017) referred to growth rates in some branches of the sectors “Production of goods” and “Basic services”: transportation and communications 3.0%; agriculture 3.0%, and construction 2.8%. They do not allow us to make conclusions with respect to GDP growth, given that the impact of the annual variations in both sectors on this growth have not been significant, as can be observed in the graph below.

In fact, the “Production of goods” sector presents in some years inverse variations to those of GDP. What is more important, we do not observe the necessary stability in the relative variations of both indicators, to be able to reach statistically valid conclusions about the expected behavior of the variation in GDP, based on the positive variation of the sector that combines the production of goods. At least this is what is suggested by the following graphs.

With respect to the tourism industry, the name of the indicator lends itself to confusion. Assuming that the increase of 4.4% refers to the revenues associated with this sector, it is necessary to consider the following: tourism has a bearing on the growth of GDP given its relevant contribution to the value of exports of goods and services, which help finance the flow of imports that impact directly on the growth of the domestic product in the case of the Cuban economy, whatever the texts say about the equilibrium equation. Yet it appears that in 2017 imports did not grow or stagnated. The annual economic report only says that this flow was “affected” but gives no figures.

The direct relations between the variations in the revenues associated with tourism and those of GDP do not provide much of an explanation. They prove to be unstable associations and statistically not relevant, as the next series of graphs show. On the other hand, the reader should pay attention to the difference between the rate of growth of international visitors, 11.9%, and that of revenues associated with the sector, 4.4%, in 2017. In fact, in this year we see a decrease in the variation of tourism revenues of more than half compared to 2016, as can be observed in the second of the graphs above.

Not much can be seen, then, through the lens of the productive sectors to shed light on the 1.6% growth in GDP in 2017. Nor does the sunny roof of tourism help. On the other hand, paradoxically, we can better see the panorama from the sidewalk of retail trade circulation.

From the report of the Minister of Economics to the National Assembly of People’s Power we can deduce that the value of retail trade increased by 3.8%, (3.818%). This is 14.6% above the increase planned for this indicator, 3.3%, as was stated in the economic plan developed one year before (Cabrisas, 2017).

A rigorous econometric model tells us, nevertheless, that the rate of growth of retail trade must have been 7.6%, exactly double that reported by official figures, assuming the growth of GDP was 1.6% and last year’s rate was a negative -0.9%. To solve the discrepancy we could assume that retail trade increased for products and foodstuffs that were added to circulation to the tune of 1.19 billion pesos, in order to account for the 3.8% growth rate stated in the official figures, and in another 1.19 billion in prices, to obtain a total variation of 7.6% that would correspond to the 1.6% growth in GDP.

Another way to say the same thing is this: according to the model, if the growth rate of GDP was a negative 0.9% in 2016 and retail trade circulation increased 3.8% in 2017, then GDP grew 0.8% in 2017. If the official figures claim that the growth rate was 1.6%, the other half exactly that is missing can be attributed to an implicit increase in prices that went undetected by the deflators.

In trying to solve the discrepancies between the estimated and the official figures, it must always be kept in mind that the model only expresses a coherent relationship between the behavior of variables; not that the growth of retail trade circulation should be the pivot of GDP growth, regardless of the sales of bars and restaurants that could accumulate in a year, as enjoyment of a minority strata of the population that concentrates the income that many more generate.

The model tells us, then, implicitly, that the official figures indicate that at least 0.8% of the growth of 1.6% of GDP, that is, half, is due to price increases.

But that recovery, to be rigorous, is not sufficiently broad. In fact, if imports do not rise, GDP cannot grow: this is a function of the current structure of the Cuban economy.

To be precise, the implicit inflation that in the case of the Cuban economy, seemingly cannot be explained through a mechanism of “deflation”, should be in the order of 7.6%, and this is what you get when you ferment the GDP 1.6% without imported yeast and in the same cracked kettle that virulently breeds the retail prices. In light of that complicated rate of growth of GDP, a more modest one of 0.8% would be a statistically acceptable and defendable palliative.  That would not be cause for shame, on the contrary, of pride, because of the enormous effort of all the workers that made it possible to achieve it in the complex situation in which the Cuban economy evolved in the year that just ended.

In light of these aspects, the proposed growth rate of 2% for 2018 does not appear difficult to attain. As pointed out above, the positive increases in the productive sectors are not precisely the condition to achieve this, although it is obvious the importance that this has for a true and healthy growth of GDP.    For the time being, the figures presented by the Plan for the coming year do not encompass all sectors, which does not allow for its systematic evaluation. But, nevertheless, some things can be gleaned.

The value of construction activities is expected to rise 12% in 2018 (Cabrisas, 2017), which undoubtedly is an important leap. In order to put it in perspective we present two graphs: the first one shows the annual rates of growth of this sector since 2007 to date and the projected figure for 2018, which stands out as the second highest in eleven years. The progression in the last years is then: in 2016, the value fell by 4.6%, while in the last year it grew 2.8%, and it is projected to grow 12% in the 2018 Plan.

Perhaps a better perspective is provided in the second graph. It shows index numbers for the same period taking 2015 as base year, when construction activity reached its peak. The conclusion here is unequivocal: resources of all kinds – cement, other dry materials in general, raw materials, construction additives, fuel, etc., will have to be available in quantities equal to or greater in 2018 than in the base year, and the same thing should occur with equipment and machinery. It is expected that the levels of organization and efficiency will improve significantly as well, and that the construction capacity in the country will also increase through different means.

A 12% increase in the value of construction activities is an ambitious goal. Now, if this is not achieved, the goal of 2% growth of GDP is not necessarily at risk. In fact, the Plan calls for an increase in the value or retail trade of 7.4%% (Cabrisas, 2017), which is more or less coherent with a GDP growth rate of 2%. We invite the reader to compare these figures with those projected by the econometric model for 2017.

If we assume the rate of growth of GDP in 2017 to have been the official 1.6% and also assume a 7.4% rate of growth of the value of retail trade for 2018, the model generates a GDP growth rate of 2.7% for the previous year. But if instead we take as a point of departure a growth rate in 2017 of 0.8%, then the model predicts a GDP growth rate of 2.1% for the year just begun.

In 2018 the growth of the value of retail trade is projected at 7.4% which obviously reflects an increase in prices. This means that the range of the GDP growth rate in 2018 will be between 2% and 2.7%. It is not difficult to figure out that projecting a 2.7% growth of GDP, resorting to the implicit inflation, and registering a variation of only 2%, allows for compensation, statistically, of the differences in the growth indicators for 2017 and 2018, whose real rate is, in both cases, closer to 0.8%.

The connotations of an increase in GDP anchored in the value of retail trade is a concept that goes beyond a strictly economic interpretation and is not the issue of the planning and evaluation of the real growth of the Cuban economy that we are now tackling. 2018 will thus be a very difficult year for the national economy, under pressure particularly of accumulated imbalances of its foreign sector, and for the Cuban society as well, burdened by the inevitable restrictions on imported goods that sustain part of its consumption, and by the increases in prices. But the planned growth of the domestic product, regardless of what it truly means, can certainly be achieved.

Econometric Model: Time Series 1990-2016

LPIBr =  + 0.7333*LPIBr_1 - 0.06137*I:1991 - 0.04997*I:1993 - 0.07326*I:1996

(SE)      (0.0151)         (0.0122)         (0.0112)         (0.00929)     

         - 0.04045*I:1998 + 0.1241*I:2001 + 0.06695*I:2005 - 0.02193*I:2014

          (0.00942)        (0.00971)       (0.00984)        (0.00939)     

         + 0.6314*I:2016 + 0.08897*S1:1991 + 0.06608*S1:2001 - 0.06622*S1:2002

          (0.15)          (0.0114)          (0.01)            (0.0106)       

         + 0.7557*S1:2015 + 0.2107*LCMERcorr

          (0.146)          (0.0122)

sigma               0.0104924  RSS             0.00132109217

R^2                  0.999425  F(11,12) =     1895 [0.000]**

Adj.R^2              0.998897  log-likelihood        83.6337

mean(LPIBr)           10.4439  se(LPIBr)            0.315924


AR 1-2 test:      F(2,10)   =  0.42057 [0.6678] 

ARCH 1-1 test:    F(1,22)   =  0.44650 [0.5110] 

Normality test:   Chi^2(2)  =   2.5331 [0.2818] 

RESET23 test:     F(2,10)   =  0.33206 [0.7251]  


(Translator: Rafael Betancourt)